Issues in Analyzing the Macroeconomic Effects of Tax Policy

This paper provides a description of issues that are important in determining the macroeconomic effects of tax policy changes. We discuss the role of assumptions about general macroeconomic modeling issues like market behavioral parameters, and the actions of fiscal and monetary authorities. Estimating the revenue feedback effects of tax policy also requires several applied measurement issues that do not typically arise in macroeconomic modeling. Each of these issues introduces significant sources of uncertainty into the macroeconomic analysis of tax policy. We use simulations of a hypothetical 10 percent cut in individual income tax rates to illustrate issues and challenges.